St. Louis, MO, Dec. 21--Solutia Inc. will need to attack more than its environmental and retiree health care liabilities to fix its financial problems, according to the St. Louis Post-Dispatch. The chemical company, which sought protection from creditors Wednesday at Bankruptcy Court in New York, also must find a way to counter slack demand for its products, high prices for energy and raw materials and tough international competition. To Solutia, all the pressures are related. The liabilities Solutia assumed when it was spun off from Monsanto Co. in 1997 have had a ripple effect on the rest of the company's finances, said Glenn Ruskin, vice president of public affairs. The company estimates its environmental, legal and retiree health care liabilities at $755 million, costing the company more than $100 million a year.
Because of the risks those liabilities pose, Solutia must pay higher interest rates to borrow money, and lenders put more restrictions on how the company can use the cash, Ruskin said. In turn, those restrictions "prevented us from making capital investments in our facilities, in our plants and production areas."
And that has hindered Solutia's efforts to become more efficient, Ruskin said, noting that the company spends more per year on its so-called "legacy liabilities" than it does on capital improvements. Solutia pays for the health care obligations out of the cash its businesses generate. In tough economic times, cash can get more scarce, putting pressure on the rest of the operation.
"We looked down the road at what was coming and thought the drain on liquidity could have put us negative in February," Ruskin said. Solutia's last few years stand in stark contrast to its first few years as an independent company. It had enough spare cash then to nearly retire its short-term debt, to repurchase 19.3 million shares of its stock and to make acquisitions.
Solutia filed under Chapter 11 of the U.S. Bankruptcy Code, which means it plans to continue operating while trying to reorganize its finances. Its petition listed $2.85 billion in assets and $3.22 billion in liabilities. Solutia chose to file for bankruptcy in New York because that court has experience handling complicated cases, including the reorganizations of Enron Corp. and WorldCom.
Solutia's case promises to be complicated, if only because of the tangled histories of the companies involved. Solutia was formed in 1997, when Monsanto Co. spun off its chemical operations. Solutia took on $1 billion in debt, a century of environmental liabilities and the health-care plans of some 20,000 retirees, most of whom worked for Monsanto. Monsanto became part of another company, Pharmacia Corp., in 2000. But when Pharmacia later put its seed and herbicide business into a separate company, it gave the new business an old name--Monsanto. Pharmacia later merged into Pfizer Inc.
One of the main questions in the reorganization is where the liabilities that Solutia is seeking to shed will wind up. Solutia wants the court to shift responsibility for its retiree health, disability and life insurance back to Pharmacia, which absorbed the old Monsanto. If that happens, Pharmacia probably would turn to the new Monsanto, which agreed when it became an independent company to assume liability for the plans at Solutia if that company was unable to fulfill its obligations.
Hugh Grant, Monsanto's president and chief executive, said after Solutia filed for bankruptcy that his company was prepared to shoulder that burden if necessary. But he added that Monsanto would resist taking on any obligations it deems unjustified.
Solutia had $2.24 billion in revenue in 2002, compared with $2.71 billion in 1998, its first full year as an independent company. Its sales had declined for five consecutive years, in part because it sold some businesses and put others into separate joint ventures. Gross profits also have shrunk, to $363 million in 2002 from $725 million in 1998.
